House price-to-earnings ratio rises, while rental costs make saving harder

The vast majority of first-time buyers are priced out of the housing market in London, an economist for one of the UK’s biggest lenders has warned.

The house price-to-earnings ratio for someone securing their first home in the capital has risen from 6.82 in the last three months of 2011 to 7.44 in the first quarter of 2012, according to analysis by the RBS Group.

Mortgage payments for these buyers now takes up 79% of their income after the deduction of tax, national insurance and other essential living costs, compared to 67% a year ago.

Fionnuala Earley, RBS Group UK consumer economist, said that although it was still cheaper to rent than to buy, escalating rental charges were making it virtually impossible to save a deposit. “The average Londoner trying to save for their first home has to spend around three-quarters of their income on rent, leaving precious little for savings. This compares to around half [of their income] for the rest of the UK,” she said.

While it takes an average of 37 months to save a 10% deposit in the whole of the UK, it takes those living and working in London 51 months. The situation is likely to get even worse as a result of the Greek and Spanish economic crises, which are making lenders increasingly nervous about lending at high loan-to-values: Santander has already announced it will scale back lending in 2012.

Elsewhere in the country, falling house prices have eased the situation for first-time buyers, with the average price of a typical first home in the UK falling by 1.2% in the first three months of 2012 compared to the first quarter of 2011, and expected to drop by about 2.5% during the whole of 2012.

But the average house price hides wide variations in first-timers’ ability to buy, which is also determined by the size of their earnings and inflationary pressures on essential spending including food, utilities and transport.

Affordability improved by 15% in Northern Ireland in the first quarter of 2012, and 11% in the east of England, thanks to house prices falling. The Council of Mortgage Lenders says first-time buyers have been quick to take advantage of the lower prices in Northern Ireland, accounting for almost two-thirds of the house purchase loans taken out in the first three months of the year. They borrowed an average of £73,350, down 40% on the £122,000 borrowed in the third quarter of 2007.

Scotland is the most affordable place to buy, where the house price-to-earnings ratio is 3.69, mortgage payments take up just 41% of discretionary income, and it takes 29 months to save a 10% deposit.

Colin Duff, a 29-year-old innovation consultant, moved to London from Scotland five years ago and has saved hard ever since. He now has a deposit of £63,000 and is looking for a two-bed apartment in north-west London costing in the region of £350,000. He intends to rent the second room out to help with costs.

“My sister, who is 31, has a glorious three-storey house in Glasgow with stained glass windows. It is worth about the same amount that I will pay for my two-bed flat in London,” he says.

“It doesn’t matter what they say – there is nowhere cheap in London unless you are prepared to buy in a really rough area or somewhere very far out.”